Payroll outsourcing is rarely worthwhile

How to avoid the most common mistakes in payroll outsourcing

Payroll outsourcing only makes sense if the conditions are right. Below you can read how to avoid the three most common mistakes in payroll outsourcing.

1. Mistake: Overestimating cost reduction effects

The most common mistake by far when planning outsourcing projects is the expectation that outsourcing will result in significant cost savings. If payroll accounting is to remain in the same quality, this is almost impossible. On closer inspection, reports of massive cost reduction effects are usually not tenable because they do not fully capture the costs.

So why is it that payroll outsourcing rarely pays off?
When calculating costs in advance, it is often overlooked that there must still be people in the company who act as coordinators after outsourcing. These HR employees ensure that all processes run smoothly. The rule of thumb for the "retained organization" is: for every 500 employees, around 0.5 full-time equivalents (FTEs) are required as capacity.

For this, here is an example calculation: a company with 2,000 employees has four employees in payroll. The personnel costs for this amount to 200,000 euros per year. So if payroll is outsourced, two employees must remain - if only because of the substitution problem. This results in annual costs of 100,000 euros.

The other 100,000 euros are used to create 24,000 monthly statements per year. This means that a statement should only cost 4.17 euros each, so that companies do not lose out here. That is unrealistic. It is more likely that good service providers will charge eight to eleven euros per statement. At eight euros per invoice, this results in 192,000 euros for the service provider - plus 100,000 euros in own costs. The result is a whopping 292,000 euros, an increase of 46 percent.

2. Mistake: Choosing the wrong IT environment for smooth payroll outsourcing

Many companies make the crucial mistake when choosing an outsourcing provider by not considering the question of a suitable IT environment, or not considering it sufficiently. It is not uncommon for companies to choose a provider without looking at their payroll program in advance. However, if the provider's software does not have automatic interfaces to the client's time management, accounting and HR information system, for example, the manual effort usually increases considerably. This results in rising costs and decreasing efficiency on both sides.

Choosing the right payroll program requires extensive specialist knowledge. So no one can make a decision that describes payroll as a black box. The urgent advice: Be sure to get independent expertise on board before deciding on a payroll outsourcer. You can find qualified candidates from our database in the payroll section.

3. Mistake: Wanting to solve internal problems with outsourcing

It is not uncommon for companies to expect that recurring payroll problems can be solved with payroll outsourcing. This expectation is bound to be disappointed. Payroll providers are the last link in the payroll process. They take data from the company and process it in a standardized process. However, if clients collect or transfer incorrect data, the end result of the process will naturally be incorrect.

One of the most important prerequisites for potentially successful payroll outsourcing is therefore to solve problems with internal HR processes in (digital) payroll accounting internally. This applies to deficiencies in internal collaboration as well as a lack of appreciation for your own employees.
 

Conclusion: payroll outsourcing is rarely worthwhile

Payroll outsourcing can only work satisfactorily if you have clean HR processes in your company, choose the right provider to suit your infrastructure and are under no illusions about the level of savings.

These outsourcing alternatives are promising

So if payroll is rarely suitable for outsourcing, the question remains: Which outsourcing options are available as alternatives? In practice, it is much easier to cut costs and reduce expenses for the following activities and processes, for example:

• Preparation of actuarial reports for company pension schemes
• Administration of company pension entitlements
• Settlement of pension benefits
• Writing employment references

About the author
The author has reached his 20th anniversary as an HR interim manager in 2025. He is frequently commissioned as Head of HR Services or HR Shared Service Centers. The interim manager's particular areas of expertise include insourcing and outsourcing projects in the HR environment as well as IT processes for simplifying and standardizing complex payroll requirements. He reports on his activities in the project reports Bridge Head of HR Service Center for Sensor Manufacturer and Bridge Head of HR Service for Natural Cosmetics.

Are you planning a payroll outsourcing project?
We are happy to support you with candidates who have successfully managed a large number of payroll outsourcing projects in a wide range of companies.